The_Times__6_March_2020

the times | Friday March 6 2020 1GM 27

Comment

Prepare for the worst but hope for the best

Government needs to use every tool at its disposal if we are to get through an economic shock as big as the 2008 crisis

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An adviser to Alistair Darling

during the financial crisis also

thinks this crisis calls for a bold

response by government. Angus

Armstrong, director of the

Rebuilding Macroeconomics

project at the Economic and Social

Research Council, says: “The

government should be the risk

manager of last resort here. The

regulators should ask banks to lend

through the crisis and insurance

companies to recognise that this is

an extreme event. They should be

encouraged to provide support for

households and communities. There

is plenty of goodwill to be won.

Households and communities

always do their part with support

and resilience.”

Worryingly, Kenneth Rogoff, a

professor of economics at Harvard,

said this week that the crisis might

not be as short-lived as we hoped.

There are parallels with the oil crisis

of the 1970s, he says. This time

sustained disruption to global supply

chains may create goods shortages in

the shops that last for months, not

just weeks. That in turn leads to

price rises and inflation.

Let’s hope it doesn’t come to that.

We may yet weather the storm.

But the chancellor must prepare in

practical terms for the worst while

the rest of us continue to hope for

the best.

chance to try to get the country out

in front of the economic aspects of

this crisis, to help businesses and

workers to endure what will be a

very difficult few months and

possibly more.

Schemes such as the “time to pay”

initiative that is designed to allow

late payment of taxes for companies

in difficulty will be extended,

although that is unlikely to be

enough on its own.

The other complication is our

labour market, where self-

employment has boomed, to great

effect, since the start of the century.

More than 15 per cent of the

workforce is self-employed. These

workers could be hit hard if they

need to self-isolate and cannot earn

a living in the gig economy of Uber

drivers and the like. The Treasury is

scrambling to find ways to help the

low-paid in particular.

Rupert Harrison, the former chief

of staff to George Osborne in the

Treasury, is so concerned that he has

recommended the introduction of a

public natural disaster insurance

scheme for lost business.

Sustained disruption to

supply chains could

create goods shortages

government may have worked out

what it really wants to do.

But a post-election rah-rah next

week will no longer do. Such is the

gravity of the threat from a sudden

demand shock that Sunak has to

deliver a “coronavirus budget” aimed

at keeping companies in business

through what is likely to be a highly

precarious period.

Those inside large and well-

cushioned businesses are often

slowest to spot where, and how

quickly, a crisis will hit. By contrast,

Britain’s six million small businesses

have to be much more nimble

because a sudden fall in revenue and

disappearance of customers can

obliterate their slim margins. After

just a few weeks, or months, many

will need help from their banks.

An epidemic, or a pandemic if it is

declared, is more like a war than a

normal economic event, and

governments have a duty to respond

accordingly. It’s no use having an

arcane discussion about whether

massive state intervention offends

this free-market principle or that.

The aim must be continuity and

alleviating pain throughout a crisis in

the hope that it turns out to be brief.

There is huge political risk for the

Tories in failing to anticipate the

danger or in mishandling it, although

ministers and officials have so far

been reassuring. The budget is their

T

he question I’ve been asked

most since writing a book

about the collapse of RBS

during the 2008 financial

crisis stems from the deep-

seated fear that catastrophe could be

just around the corner. “When”,

people ask, “is the next crisis going

to be and what will cause it?”

When responding I try not to

overdo the gloom. Britain’s

fundamental prospects are good.

There will always be economic crises

because periods of exuberance are

followed by corrections. But the

bigger picture remains one of

improvement and innovation.

That said, the next crisis is here

now. When Daniel Yergin, the

respected author of The Prize: The

Epic Quest for Oil, Money & Power,

points out that the fall of at least

15 per cent in global demand for oil

since coronavirus hit is the worst

such event in history then we all

have a problem. That fall in demand

will mean less manufacturing and

more factory layoffs, for a start, as

the global trading system slows. Our

banking system is more resilient

than it was in 2008 but when

customers come under strain as the

economy contracts it’s not long

before banks feel the pain.

Unless we are very lucky and catch

a break via the weather, the virus is

going to do serious harm. Most of

the data published recently showing

only a minor impact in Europe is

weeks out of date. The more recent

evidence is of a collapse in demand

for travel, hotels, conferences and

discretionary spending as consumers

rein themselves in and companies

cut back.

It’s in this unpromising context

that the new chancellor will deliver

his first budget next week.

Before the virus struck Rishi

Sunak had been expected to produce

an upbeat holding statement centred

on a tax tweak or two while rattling

through extra money for police and

the NHS to deliver Boris Johnson’s

feel-good manifesto pledges.

Another budget is planned for

later this year, by which point the

An epidemic is more

like a war than normal

economic episodes

Iain

Martin

@iainmartin1